KINGSTONE COMPANIES, INC. annual report, FY2011

Kingstone Companies, Inc. — FY2011 Form 10-K

Reporting period: Fiscal year ended December 31, 2011; comparative figures are for FY2010. This is an annual report, not a standalone fourth-quarter report. Kingstone primarily underwrites property and casualty insurance in New York through Kingstone Insurance Company (KICO); Pennsylvania was licensed but had no written business in 2011.

Financial results and position

Metric	FY2011	FY2010	Change
Total revenue	$27.69 million	$21.60 million	+28.2%
Net premiums earned	$14.87 million	$11.14 million	+33.5%
Net income	$2.50 million	$0.98 million	+154.5%
Diluted earnings per share	$0.64	$0.29	Up
Operating cash flow	$7.25 million	$3.72 million	Up

Direct written premiums rose 22.5% to $40.73 million; policies in force increased 20.1%. Net written premiums grew 18.6% to $16.30 million.
Net loss ratio was 57.6% versus 57.7%; net underwriting expense ratio was 17.1% versus 17.0%; net combined ratio was 74.8% versus 74.7%. Underwriting income increased to $3.75 million from $2.82 million.
Net investment income was $0.75 million and realized investment gains were $0.52 million. The latter included a $0.13 million recovery from the FDIC tied to a failed bank.
At year-end, total assets were $69.70 million, total liabilities $54.39 million, and stockholders’ equity $15.31 million. Investments totaled $27.24 million; cash and cash equivalents were $0.17 million.
Debt consisted of $747,000 in notes due July 2014 at 9.5% and $300,000 drawn on a $500,000 demand line of credit. The line bears a floating rate and is secured by specified company assets. The filing says management expected cash flows to cover working capital needs over the next 12 months.
Gross loss and LAE reserves were $18.48 million, with $9.96 million of reinsurance recoverables on unpaid losses. Total reinsurance receivables, including unearned ceded premiums and paid-loss recoverables, were $23.88 million.

Material changes and unusual items

Growth in policies in force and higher-premium business drove premium growth. The company expanded its New York market into parts of western New York.
Tropical Storm Irene generated $1.80 million in direct catastrophe losses and LAE, or $0.45 million net of reinsurance, adding 3.0 percentage points to the net loss ratio. Irene also reduced contingent ceding commission revenue by approximately $0.20 million.
Other underwriting expenses increased 27.6% to $7.37 million, reflecting business growth and additional staffing. Corporate operating expenses fell 25.3% to $1.20 million, while interest expense declined following debt repayment and repricing.
The company prepaid $703,000 of notes, extended the remaining notes’ maturity to 2014, and reduced their interest rate from 12.625% to 9.5%. It also obtained the $500,000 credit line.
Kingstone declared its first common-stock dividends in 2011: $0.03 per share in each of August and November, or $0.06 per share for the year. It repurchased 78,486 shares in December for approximately $237,000.
KICO’s A.M. Best rating improved from B (Fair) to B+ (Good); its annual review was ongoing. Its Demotech rating was A (Excellent).

Outlook, risks and contingencies

Management stated that it expected available cash flows to fund near-term and 12-month working capital needs; the filing provides no earnings or revenue guidance.
Management has been reducing reliance on quota-share reinsurance. This may raise earned premiums but reduce ceding commission revenue in future periods; the company remains liable to policyholders if reinsurers fail to pay.
Key risks include catastrophe and severe-weather losses, claims severity and reserve-estimation uncertainty, reinsurer credit and availability, investment-market and interest-rate exposure, rating changes, competition, and New York regulatory and geographic concentration. All 2011 revenue was derived from New York.
As of December 31, 2011, KICO was reported in compliance with risk-based capital requirements. It had two IRIS ratios outside usual ranges, which the filing attributed to quota-share reliance and growth in surplus.
The New York insurance department began a financial examination of KICO in January 2012. The IRS was examining the company’s 2009 federal tax return; final results were unknown, and management said it was confident in its tax positions.
Management said recorded reserves were adequate, but noted that actual claims may differ materially from estimates. Historical loss-development disclosures show adverse development for older accident years.
KICO’s CEO role passed to Kingstone CEO Barry Goldstein effective January 1, 2012; former KICO CEO John Reiersen moved to a part-time executive vice president role.

Important facts for investors to verify

Reconcile the filing’s differing estimates of KICO’s maximum dividend without regulatory approval: approximately $792,000 in one section and $617,000 in the liquidity discussion.
Assess reserve adequacy and adverse development, especially given growth in net reserves and the company’s reliance on actuarial estimates.
Review reinsurance collectability and concentration: three reinsurers represented 71.9% of reported paid and unpaid loss recoverables; confirm collateral and counterparties’ financial strength.
Evaluate the investment portfolio’s credit exposure: 33.2% of fixed-maturity securities were rated BBB at year-end, up from 15.9% in 2010, and most portfolio fair value was in fixed maturities.
Track the A.M. Best review, the KICO examination, and the IRS audit, as well as the effects of reduced quota-share reliance on future premiums and ceding commissions.